Benefits of Commodity Exchange
The following are the major benefits or importance of commodity exchange. They also entail the roles which commodity exchange plays in the economic development of a country.
(i) Increase in Agricultural Production: Commodity exchange has helped in enhancing and promoting large-scale agricultural production. For example, those engaged in agriculture will be inclined to plant seeds for crops that they know are guaranteed to be sold so long as they achieve minimum standards of quality.
(ii) Stabilization in Agricultural Product Pricing: This is done by fixing price to be executed in trading at a pre-determined period so as to prevent the risks of price fluctuation in the world market.
(iii) It encourages the exploration of solid minerals: The exploration of metals and oil is encouraged since present and future demands are visible.
(iv) They ensure increase foreign exchange earnings: It has served as a source of revenue and income to individuals, firms and government in a country and this helps to ensure increase or improvement in the standard of living.
(v) Improved Agricultural Output and Quality: Commodity exchange helps to standardize prices and quality of commodities to be traded between the participants.
(vi) They provide a good and secure environment where members meet to trade their commodities.
EVALUATION
- Give four advantages provided by commodities exchanges.
- Outline and explain six roles of commodity exchange in economic development countries.
Constraints to Commodity Trading
The following are the constraints or problems to commodity trading:
(i) Inadequate Supply: The supply of some commodities may be inadequate especially when unexpected poor harvest affects discharge of future contract.
(ii) Bad Weather: Most of tradable commodities, especially agricultural products, are subjected to climatic or weather condition, thereby causing a limitation to commodity trading.
(iii) Inadequate Knowledge of the Workings of the Commodity Exchanges: Inexperienced and unskilled agents and contractors which lack the skills and knowledge of the workings of the commodity exchange hinder patronage and participation.
(iv) The Problems of Middlemen: The presence of middlemen or agents who often cause artificial scarcity inflation of commodity process is also a major constraint to commodity trading in Nigeria.
(v) Poor Storage Facilities: This usually reduces the quantity of soft commodities available for sale as some quantity decays over time.
(vi) Ethical Issues: Speculative activity may have a destabilizing effect on prices. Speculators can collectively cause prices to rise or fall in their pursuit of Profit.
(vii) Problem of Price Fixing: The prices of tradable commodities that are fixed ahead of trading period often suffer certain fluctuation due to shortage or overproduction which may warrant a change in already fixed prices of commodities.
EVALUATION
- State five constraints of commodity exchange in Nigeria.
- Discuss five problems militating against the growth and prosperity of commodity trading in Nigeria.
- What solutions can be proffered to the problems listed above?
- Relate how the problems of commodity trading can affect the national economy.
Meaning of Commodity, Commodity Exchange and Stocks
Commodities mean tangible things, such as products are things we can see. Commodity exchange is an exchange where various commodities and derivative products are traded. Stocks are intangible things (cannot be seen) that are traded on the Stock Exchange market.
Differences between Commodities and Stocks
| S/N | COMMODITIES | STOCKS | |
| 1. | Commodities entail immediate consumption of products for domestic and industrial purposes. | Stocks entail investment in a company. | |
| 2. | Commodities are tangible in nature which is consumed. | Stocks are intangible in nature | |
| 3. | Commodities involve passing of ownership and titles of goods between the seller and the buyers. | Stocks allow taking ownership in a company | |
| 4. | Traders are involved in selling and buying of commodities. | Brokers are involved in buying and selling of stocks. | |
| 5. | Commodities are traded in commodity exchange market. | Stocks are traded in stock exchange market. | |
| 6. | Commodities often came into existence through production process. | Stocks came into existence through issuing processes. | |
| 7. | The return on tradable commodities is known as profit. | The return on stocks is known as dividend. | |
Similarities between Commodities and Stocks
The similarities between commodities and stocks include the following:
- They can be bought and traded
- They require large sum of money to trade with.
- The profits/dividends from trading on commodities and stocks are usually very high
EVALUATION
- What is tangible and intangible commodities?
- State five differences between commodities and stocks.
- State the similarities between commodities and stocks.
- Explain the difference between ‘tangible’ things traded and ’intangible’ things.
- Mention five components of commodities.
- Stocks are intangible things. Explain
- Explain to an investor the advantage of stocks over commodities.
- List four tradable commodities each under the following sub headings:
(a) Soft commodities
(b) Hard commodities
(c) Energy commodities
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